Pakistan Considers Cheaper Iranian Oil, Gas: Boost for Refineries and Gas Utilities

What Pakistan's move on Iranian energy means

Pakistan's Petroleum Minister, Ali Pervaiz Malik, recently stated that the government is actively considering importing cheaper oil and gas from Iran. This move comes after a temporary easing of US sanctions on Tehran, opening a potential new avenue for Pakistan to secure energy supplies at a discount. The minister highlighted that this initiative is part of broader efforts to reduce domestic oil prices and provide relief to the public, who have faced difficulties due to recent fuel price hikes.

Industry estimates suggest that if Pakistan can meet 10% to 20% of its total petroleum requirements through discounted Iranian supplies, including freight savings, it could save between $170 million and $340 million in import costs annually. While local refineries are technically capable of processing Iranian crude, experts point out that there are commercial and operational challenges. Notably, Iranian crude tends to yield a higher proportion of furnace oil, for which domestic demand in Pakistan is currently limited.

Why cheaper energy matters for refinery and gas utility stocks

This potential shift in energy sourcing could have a notable impact on Pakistan's energy sector. For local refineries, securing cheaper crude oil as a feedstock directly translates into lower input costs. This can improve their refining margins, which is the difference between the price of crude oil and the prices of the refined products it produces. Even with the challenge of higher furnace oil yield, the overall reduction in raw material costs presents a positive outlook for profitability.

Similarly, the prospect of importing cheaper gas from Iran is significant for gas utilities. Natural gas is a crucial component of Pakistan's energy mix, and imported liquefied natural gas (LNG) often comes at a higher cost. Accessing cheaper gas supplies would reduce the overall cost of gas for utilities, potentially easing the financial burden of circular debt and improving their operational efficiency. Circular debt refers to the accumulation of unpaid dues across the energy supply chain, which often strains the finances of power generators and gas utilities.

Which stocks, and why

Local refineries stand to gain from the potential import of cheaper crude oil. Companies like National Refinery, Attock Refinery, and Pakistan Refinery could see their profitability improve as their primary raw material cost decreases. While the higher yield of furnace oil from Iranian crude presents an operational consideration, the overall benefit of a lower-cost feedstock is expected to be positive for their refining margins.

For gas utilities, the availability of cheaper LNG from Iran would be a positive development. Sui Northern Gas Pipelines and Sui Southern Gas Company are the two major gas distribution companies in Pakistan. A reduction in their cost of imported gas supply could help alleviate financial pressures, improve their cash flows, and potentially contribute to a reduction in the country's energy circular debt.

What to watch

Investors should closely monitor developments regarding the actualisation of these import plans. Key indicators will include official announcements on specific agreements with Iran for oil and gas supplies, details on pricing mechanisms, and any policy adjustments to address the operational challenges, such as the higher furnace oil yield from Iranian crude. The extent to which these cheaper imports translate into measurable reductions in input costs for refineries and gas utilities will be crucial in confirming the long-term impact on their earnings.